Yes. Under Section 1.125-1(m), employees are able to reimburse themselves for personal health insurance policy premiums tax-free. See below for the pertinent section of the New Regulations for Cafeteria Plans. Many companies provide Section 125 Administration for group health insurance. See www.zanebenefits.com/employee for an example of how this works for your individual health insurance plan.


New Regulations: Section 1.125-1

(m) Payment or reimbursement of employees’ individual accident and health insurance premiums--(1) In general. The payment or reimbursement of employees’ substantiated individual health insurance premiums is excludible from employees’ gross income under section 106 and is a qualified benefit for purposes of section 125.

(2) Example. The following example illustrates the rule of this paragraph (m): 

Example. Payment or reimbursement of premiums.(i) Employer P’s cafeteria plan offers the following benefits for employees who are covered by an individual health insurance policy. The employee substantiates the expenses for the premiums for the policy (as required in paragraph (b)(2) in §1.125-6) before any payments or reimbursements to the employee for premiums are made. The payments or reimbursements are made in the following ways:

(ii) The cafeteria plan reimburses each employee directly for the amount of the employee’s substantiated health insurance premium;
(iii) The cafeteria plan issues the employee a check payable to the health insurance company for the amount of the employee’s health insurance premium, which the employee is obligated to tender to the insurance company;
(iv) The cafeteria plan issues a check in the same manner as (iii), except that the check is payable jointly to the employee and the insurance company; or
(v) Under these circumstances, the individual health insurance policies are accident and health plans as defined in §1.106-1. This benefit is a qualified benefit under section 125.

Professor Paul Zane Pilzer is scheduled to speak with Mike Rosen of 850 KOA Radio today.
(Edited at 5:10 pm MST 1/19/2010): You can listen to a recording of the show here

Note: None of this should be taken as legal or tax advice.

In a previous post, Rick described how a self-insured group health plan works. The purpose of this post is to provide an example of how HRAs and individual policies (what we call "ZaneHRA") might replace a company's self-insured health plan. 

Using the example from Rick's earlier post, the following illustrates how a switch to ZaneHRA might help a company (who is currently self-insuring their health plan) reduce their health benefit liabilities.

Illustrative Example: ABC Manufacturing (1000 employees)*


Annual Exposure and Cost with a Self-Insured Group Health Plan

ABC Manufacturing's group health insurance is partially self-funded with a Third Party Administrator (TPA). They purchased a stop-loss policy covering claims in excess of $20,000 per employee per year that costs them $50,000 ($50 x 1,000) per month. The stop-loss policy caps ABC Manufacturing's exposure at $20,000 per employee per year. ABC Manufacturing's total risk exposure for the year is $20,000,000 (1,000 x $20,000) in claims. They predict that total claims for the year will total $5,000,000 which equates to an average monthly premium of approximately $467 per employee ($5,000,000 / 1,000 / 12 + $50).

Total Annual Risk Exposure = $20,000,000
Predicted Actual Cost = $5,600,000 (or ~$467 per month per employee)


Annual Exposure and Cost with ZaneHRA

ABC Manufacturing makes available an average of $5,600 per year (~$467 per month) to each employee using ZaneHRA. Their total risk exposure for the year is $5,600,000 ($5,600 * 1,000) Each employee purchases their own individual insurance policy and uses ZaneHRA to get reimbursed tax-free. Since ABC Manufacturing only has an expense if HRA funds are utilized with ZaneHRA, they predict that only 80% of the ZaneHRA funds will be utilized this year costing them approximately $373 per employee per month ($467 x 80%).

Total Annual Risk Exposure = $5,600,000
Predicted Actual Cost = $4,480,000 ($5,600,000 x 80%)


In this example, ZaneHRA reduces ABC Manufacturing's Annual Risk Exposure by $14,400,000. Additionally, ZaneHRA is predicted to reduce ABC's costs by 20% (or $1,120,000).

*This example is meant as an easy-to-follow illustration for educational purposes only and is not necessarily indicative of actual costs in the market.

Note: None of this should be taken as legal or tax advice.

HRAs (Health Reimbursement Arrangements) are governed by Section 105 of the Internal Revenue Code. Only employers may contribute to HRAs. All reimbursements are excluded from an employee’s gross income and wages subject to FICA (7.65%). Similarly, employers deduct reimbursements as a business expense and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%).

See Publication 969 for more information.

Note: None of this should be taken as legal or tax advice.

A salary reduction agreement is a written agreement between an employee and their employer in which the employee elects an amount of taxable income to be voluntarily withheld from their pay.  Salary reduction agreements are the basis for Section 125 "Cafeteria Plans" that give an employee a choice between taxable income and a non-taxable benefit.